Will the Senate health bill tame costs?

By Jeanne Sahadi, senior writerDecember 24, 2009: 7:20 AM ET

NEW YORK (CNNMoney.com) -- The health care reform bill approved by the Senate on Thursday would do more than any proposal yet to reduce the deficit over time - by an estimated $132 billion over 10 years and by substantially more thereafter.

Butreducing the deficit is not entirely synonymous with the oft-stated goal of health reform: reducing the growth rate in health care costs and expenditures - often referred to as "bending the cost curve."

That growth rate is what drives federal spending on Medicare and other federal health programs.

And it's what budget experts say will pummel the federal budget in future years if nothing is done to change it.

So how would the Senate bill fare in bending the cost curve from the perspective of the federal budget? The short answer is the ever-unsatisfying "it depends."

The Congressional Budget Office estimates the bill could over time reduce the federal budget commitment to health care - that's spending on programs like Medicare plus the amount of health-related federal tax breaks.

For instance, the CBO estimates that Medicare spending per beneficiary would grow by an average of 2% on an inflation-adjusted basis over the next two decades. That's half the 4% annual growth rate that has marked the past two decades.

But that estimated reduction is highly dependent on a number of factors.

More than anything, it depends on whether this and future Congresses will do what the bill says ... to the letter. The budget agency noted such stick-to-itiveness is rare when it comes to major legislation and said the bill includes measures that "might be difficult to sustain over a long period of time" - such as reduced pay increases for various Medicare service providers.

And reducing the federal budgetary commitment to health care also depends on how well the cost-bending provisions in the legislation work.

In addition to the Medicare savings called for in the bill, two other major provisions could help bend the cost curve, according to former CBO Director Donald Marron.

The first is the creation of an Independent Payment Advisory Board that would recommend ways to reduce Medicare's spending growth beyond what the legislation calls for.The second is the establishment of an excise tax on very expensive health plans intended to encourage employers and their workers to become more consumer savvy in their health spending choices.

The CBO said in particular that the bill's savings potential depends on whether thenew Medicare board's recommendations effectively control the growth rate in Medicare spending.

"We need real entitlement reform," said Douglas Holtz-Eakin, another former CBO director. He thinks the board could help make meaningful fixes, but he doubts that Congress will follow the board's toughest recommendations.

Savings could be jeopardized, further, if any cost-bending provision is weakened or eliminated when the Senate and House hammer out their differences early next year on what a final health reform bill should look like.

Lastly, how farthe Senate bill bends the cost curve depends on the success of pilot programs in the legislation designed to make health care delivery more cost-efficient.

"They're setting up a framework under which we can learn what bends the cost curve over time," said Josh Gordon, policy director at the Concord Coalition, a deficit watchdog group.

In the meantime, while the bill is projected to reduce the deficit in between 2010 and 2019, the federal budget commitment to health care will increase by an estimated $200 billion because of provisions in the bill that call for, among other things, the federal government to subsidize the purchase of insurance by many Americans.

Best-case scenario

CBO estimates are never flawless. The agency strives to offer middle-of-the-road readings, neither too optimistic nor too pessimistic. And they're based on the language of legislation, not the political realities of Congress.

"I would say the risks [including the political ones] tend to lean towards everything costing more and saving less, but it isn't out of the realm of possibility that the bill could save more than CBO suggests," Gordon said.

Assume for a moment, though, that the CBO analysis is dead-on. The agency estimates that the Senate bill could reduce federal budget deficits by between one-quarter percent and one-half percent of GDP in the decade after 2019.

That's a step toward putting the federal budget on a more sustainable track. But it's just a start.

Here's what modest means. The so-called fiscal gap is estimated to be anywhere from 4% to 8% of GDP, Marron said. That's a measure of how much spending would need to be permanently cut or taxes permanently raised if lawmakers were to put the federal budget on a more sustainable track long-term.

The Senate bill could move the needle by 0.5% of GDP in CBO's best-case scenario.

While that doesn't seem like a lot, it's far from nothing,especially given how hard the goal of curbing health costs is. And it's an indication of just how hard the fight will be next year when lawmakers are expected to consider proposals for how to address deficit reduction long-term.

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